Endogenous Shifts in OPEC Market Power: A Stackelberg Oligopoly with Fringe
28 Pages Posted: 1 Aug 2013
Date Written: July 2013
This article proposes a two-stage oligopoly model for the crude oil market. In a game of several Stackelberg leaders, market power increases endogenously as the spare capacity of the competitive fringe goes down. This effect is due to the specific cost function characteristics of extractive industries. The model captures the increase of OPEC market power before the financial crisis and its drastic reduction in the subsequent turmoil at the onset of the global recession. The two-stage model better replicates the price path over the years 2003-2011 compared to a standard simultaneous-move, onestage Nash-Cournot model with a fringe. This article also discusses how most large-scale numerical equilibrium models, widely applied in the energy sector, over-simplify and potentially misinterpret market power exertion.
Keywords: crude oil, OPEC, oligopoly, Stackelberg market, market power, consistent conjectural variations, equilibrium model
JEL Classification: C61, C72, L71
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